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Laszlo Birinyi, 65, has spent more than 30 years studying the stock market, analysing everything from daily closing prices to advance-decline lines. He and his colleagues at Birinyi Associates, which he founded in 1989, try to get an edge by turning the data into investment ideas.

For Birinyi, whose Westport, Connecticut firm also manages about $250m (€183.3m) in assets, 2008 was a tough year in terms of performance, as it was for most money managers. The firm's managed accounts were down last year, though typically ahead of the S&P 500's 40% loss by five to eight percentage points, he says. However, Birinyi is approaching the new year with cautious optimism, having published a note last month titled "S&P 750: The Bottom."

Barron's: You are a longtime observer of the market going back to the mid-1970s. What's your assessment of what happened in 2008?

Birinyi: It was a unique market in that, first of all, it was not a market crisis, it was a markets crisis. Unlike Long Term Capital Management in 1998, when the issue was debt, or in 1994, when the issue was Mexico, this permeated across all markets, and it was global. So it wasn't just the US or Europe or Russia. This was all markets, all over. There were no areas where you could take shelter, whether it was commodities, money markets, municipals or segments of the stock market.

Barron's: Was it the worst market you have seen?

Birinyi: Absolutely, because in 1974, which is the market most similar to this one today, you had a much smaller universe.

The market was considerably smaller, and Wall Street was, for the most part, private firms. And while in terms of impact on individuals, 1974 might have been just as bad, there were just a lot fewer individuals involved in trading and making markets, because 1974 basically was about stocks and bonds and nothing else.

Barron's: Your Website says the firm's approach, in part, is "to understand the psychology and history of the market and most importantly the actions of investors." Could you elaborate?

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Birinyi: One thing about market behaviour that has really not been discussed widely is the impact of a lot of structural changes that have taken place over the last 15 or 20 years.

In 1987, the market's decline was somewhat arrested by the action of the New York Stock Exchange specialists; the market makers had a fiduciary responsibility to try to even out the volatility. But with all of the electronic trading today, no one necessarily has that responsibility.

When you remove something like the short-selling uptick rule and basically squeeze commissions to the point where no one has the incentive to make markets, there is a more dramatic increase in volatility because there is no one else on the other side of a trade, and no one has to be on the other side. In 1987, there were market makers whose responsibility was to at least try to slow the decline, if they couldn't stop it.

Barron's: You've argued that the institutional knowledge of market makers has been diminished owing to structural market changes -- i.e., the advent of electronic trading.

Birinyi: That's right. For me, one of the things that has had a negative impact, especially among mutual fund investment advisers, is they have gone to almost automated trading where people try to slice an order into many, many pieces -- and they've gotten away from having a trader accumulate and distribute the order while at the same time gathering market intelligence and providing market input. It reminds me of something my old business school professor Peter Drucker once wrote: that one reason the Germans lost World War I was not enough generals got killed. His point was that people were so far removed from the action that they really didn't know what was going on. Nowadays, we don't have many traders with the market intelligence and an understanding of what's transpiring on a day-to-day basis.

Barron's: You spend a lot of time looking at various market indicators. How have those indicators changed in terms of what you think is important?

Birinyi: There have been huge changes. For example, when I came into the business, we still looked at the odd-lot indicator, if only as an indication of what the individual investor was doing. No one has mentioned the odd-lot indicator in the last 10 years.

Likewise, once upon a time we looked at mutual fund cash positions. No one looks at mutual fund cash anymore because funds are so large that to take an 8% or 10% position in cash is not making a market bet. Instead, it is making a business bet, because funds are so big that if they are wrong, they can't invest that cash in a matter of days like they could, say, 25 years ago.

Barron's: What are you paying attention to these days?

Birinyi: An indicator that we developed is the number of stocks that are down 50% from their highs. At the market bottom recently, 322 of the S&P 500 stocks were down 50% from a year ago; that's an extremely oversold condition. The previous record, which was set in July of 2002, was 130 stocks. To us, that's a very useful measure of whether the market is oversold or overbought.

We have also found tremendous value in creating an index that studies group movements, especially group rotation, and historical relationships between those groups and fundamentals such as the market and interest rates.

Barron's: What are some pillars of conventional investing wisdom you think are flawed?

Birinyi: There always has been this contention that the market has some sort of a rotational process where at the beginning of a bull market, you have financials and small-capitalisation stocks leading the way. But we found that's not necessarily the case, and so it is enabling us not to get caught in some of the traps of what do you do at the end of a bear market and what do you do if interest rates are going up. That's because we've found that conventional wisdom is often not correct.

Another one is this idea of capitulation, which suggests that at the end of a bear market, heavy cash positions are taken and you have a great deal of selling -- but that is not borne out. We love to point to a New York Times article in the summer of 1982 which talked about this in great detail. The article suggests that a capitulation was likely to happen that fall. What was interesting, though, was that the market had actually bottomed the week before. So everyone was looking forward to a capitulation when in fact the market had already gone higher.

Barron's: You put out a piece in 1996 asserting that technical analysis had failed. What's your stance on that today?

Analysis of the stock market really should be somewhat comparable to a physical where you spend as much time diagnosing as you do prescribing. I find that too many technicians prescribe and really don't try to understand what they are looking at.

I also find that a lot of technical indicators are not predictive. For example, an advance-decline line tells you that a lot of stocks are going down but it doesn't necessarily tell you about what's going to happen.

Barron's: You published a note last month titled "S&P 750: The Bottom." What led to that conclusion?

Birinyi: A few things caught our eye. One was that we started to have some very bad days in November but the market still recovered. On December 5, the unemployment news was really terrible and yet the market recovered that day, with the S&P closing up 3.7%. To us, those are signs of a positive market where people are starting to look beyond the bad news.

We also like it that stocks such as ExxonMobil and Chevron are starting to do very well, even though oil prices have dropped. That suggests to me that people were trying to get into the market via the back door, because you could put a lot of money to work in an Exxon or Chevron.

Barron's: What else caught your eye in calling a market bottom?

Birinyi: We did an analysis that came out of our cycle study, and it showed that the greatest amount of decline in a bear market is always at the very end of the bear market. As we saw it, if indeed the market did bottom in November, as we suggested, a total of 70% of the decline occurred in the last quartile of the bear market. We also noticed that financial stocks were starting to show some stability, as well as large-cap stocks.

The conventional wisdom is that small- caps are a good place to be when the economy starts to turn around.

There are many things that are logical and work in the laboratory but in the real world they are different. This requires a lot of data and analysis. Not everyone has the time and resources to go ahead and do these things, especially an individual investor. We find that a lot of things that we read or that people say are really very dubious.

Barron's: In your note about the market having bottomed you were concerned about growth stocks. Why is that?

Birinyi: There is a lot of money in growth mutual funds and aggressive growth mutual funds. But today in the category of growth, you would be hard-pressed to find many stocks doing well.

You once had the Nifty Fifty or some group of stocks considered to be in the growth category and where a lot of people were active. But today it is very hard to find names that are so categorized. In the past, they have been the focus of attention and been able to pull the rest of the market ahead. But nowadays, a stock like an IBM is just another stock, and it doesn't have the glamour or the halo effect these stocks were given in the past.

Barron's: While you say the market has bottomed, you don't necessarily see it going up very much for now, noting, "We expect volatility, fits and starts and the continuation of an environment where every data point is interpreted as a new trend."

Birinyi: There is so much daily information available that to make a 12-month prediction is very difficult. The trends are much more condensed and compressed than they were.

At the beginning of 2008, we expected that over the next three to six months -- and perhaps longer -- that the market would be somewhat trendless. That is pretty much what we are looking for now going into 2009. We already know that this market is going to continue to be volatile, to be driven by that day's news, and one in which trends are going to be difficult to discern. But at the end of the day, we don't think the market is going down from here.

Barron's: Where do you see investment opportunities today?

Birinyi: One thing investors, especially even institutional investors, should think about is not so much strategy but tactics. This market is somewhat similar to the fourth quarter of a football game where you are behind by only four points. You are not going to complete a 60-yard pass. So you have got to go for six 10-yarders or whatever. What we focus on is taking small bites.

Barron's: Where are you nibbling?

Birinyi: We're willing to settle for 10% to 15% gains in a four- or five-day period, rather than buy and hold, because one quarter today can ultimately destroy a stock. For example, eBay was a growth stock until in the fourth quarter of 2004, when it missed its number, and since then it has gone off the charts. You can't just have a wonderful long-term perspective.

We are willing to set up for 10% or 15% gains, especially in a short time period, because we've seen the markets reverse so often and so swiftly.

Barron's: How about a few quick stock picks?

Birinyi: We have a little bit of a different perspective on General Electric. Given that it pays an 8% dividend, it has limited downside, though it is probably not going to make us a whole of money in the next three to six months. But if we don't make money on GE in the next 12 or 18 months, then we've got some real problems.

Barron's: What else do you like about GE?

Birinyi: They have global reach and a number of different business units. And they've said the dividend is going to be solid, so it will be a huge credibility issue if that changes.

And we still like Amazon.com. It's a controversial name and the stock has had a difficult time, but we're encouraged by the success of its product known as the Kindle, an electronic book.

Another name we like is Hess, an oil company. It's a solid company, and it has a very nice trading pattern between 42 or 43 and 50. We buy it low and try to sell it high.

Barron's: Thanks, Laszlo, and Happy New Year.

-- By Lawrence C. Strauss, write to lawrence.strauss@barrons.com
-- This article is available at www.barrons.com